Entrepreneurship in the extremes

Maybe some of the following phrases sound familiar: “I want to start a business but don’t know what to do,” “I’m not sure what to focus on in the future,” “I have an idea, but I don’t know if it will work,” etc.

For better or worse, I've been in this situation too, yet life has led me to entrepreneurship almost by luck. My first job was reviewing electricity contracts (basically hitting the same key for 8 hours straight), I quit. The second job was as a financial analyst, I quit. The third job was as a street sweeper (I didn’t quit that one, but I didn’t renew my contract 🙃), but what I learned in that phase and later in entrepreneurship was the value of fat tails.

The Fat Tail and the Problem of the Average

I read about this concept through Nassim Nicholas Taleb, who explained that focusing on the average makes us lose sight of the fact that risk (and reward) usually concentrate at the extremes. An illustrative example would be that living at an average of 25°C doesn’t mean a place has perfect weather, as it’s not the same if the range is from 23°C to 27°C, compared to 0°C to 50°C.

In the same vein, the opposite is also true: Great returns are not generated through the average, but at the extremes. Recently, I tweeted showing exactly these results in the investment portfolio of the SeedRocket incubator, where 5 out of 61 startups have generated a double-digit multiple (Captio, Habitissimo, Deporvillage, Kantox, and Holded), making the entire portfolio profitable.

Another example is the tweet by Anthony Pompliano about Mark Spitznagel, an investor who generally lost millions annually by focusing his investment strategy on the occurrence of an extreme event. This event took place during the 2008 crisis, yielding a 4,144% return in the first quarter of that year. Forbes also wrote that the fund he manages has had an average annual return of 76% since 2008. Incredible.

The Fat Tail Concept for Entrepreneurs

Without knowing or having a clear idea of this way of understanding portfolios, both Álvaro Peña and I have always looked to see what stands out to focus on it. In our experience as entrepreneurs (mine is approximately 6 years), we have always operated in the same way: start with our own resources, scale the projects organically, and reinvest efforts and profits into projects that show traction.

I should clarify that I’m not against external funding; I believe that the right investors, with the right amounts and terms, bring invaluable knowledge and value. However, we like to use our own resources.

We started in 2016 with the creation of projects parallel to iSocialWeb, our digital marketing agency and main focus of our work. This phase of creation culminated in September 2018, after the sale of all the projects we had:

As you can see, we were replicating the same behavior that SeedRocket had demonstrated with its investments. We invested in what could stand out, and when it did, we doubled down.

After closing that phase and finding ourselves back at square one, we resumed creating our own projects (note: current projects are private until they reach critical mass 🤐):

And once again, we find this pattern where a few projects stand out and compensate for the whole. That’s the goal.

The Fat Tail Concept in Life

This concept might seem a bit out of context for the article, but it’s something I wish my past self had read, so I’m including it. I believe the concept of “if you don’t know what to do, do nothing” is deeply ingrained, but I’m quite opposed to this idea.

If you do nothing, you cannot generate more experiences and thus more knowledge that illuminates your passions, interests, or goals. In my case, I studied a degree I didn’t like, started several projects I wasn’t passionate about, traveled to countries that didn’t captivate me, but what I did do was expose myself a lot.

And I’ve realized that by exposing myself, I’ve discovered things that not only do I like, but I’m passionate about. In the words of Naval Ravikant: “What is good for society (the consensus) doesn’t have to be good for you (the truth).”